Earlier this year, a Florida appeals court adopted the Trulia decision from Delaware – In re Trulia, Inc. Stockholder Litigation, 129 A.3d 884 (Del. Ch. 2016) being a key Delaware case regarding the approval of merger related class action settlements. Before Trulia, class actions challenging mergers could (and often did) resolve via something called a “disclosure only settlement” – that is, the target company resolved the class action by making additional disclosures related to the deal but did not enhance the cash value consideration to stockholders. Trulia presented a new reality that such settlements would not be approved.  Many commentators saw this as a serious blow to class actions challenging mergers (the major form of pre-closing merger challenge).

As the authors of the linked article observe, post-Trulia, appraisal claims increased. While the linked article does not deal with the reason Trulia may be linked to increased appraisal, readers of this blog may see the connection immediately. Appraisal actions can be driven, in part, by a lack of information (or an asymmetry of information) between the target/acquirer and shareholders. Pre-Trulia, pre-closing class actions were more common; even if they did not result in increased consideration, the extra disclosures could provide additional information to the marketplace. And, for shareholders considering appraisal, an indicia whether pre-closing discovery yielded a ‘smoking gun’ – or additional information that showed the merger undervalued the target. The settlement also acted as a ‘bought release’ – releasing the breach of fiduciary claims (pre-closing!) for the class. But post-Trulia, as such cases have seen diminished use, shareholders are left with less information, classwide pre-closing releases are less prevalent, and thus post-closing remedies gain in importance: hence, appraisal.

Will Florida see an uptick in appraisal now that a Florida appeals courts has adopted Trulia? One would think it likely.

Two bidders have sought to buy Florida based Perry Ellis – one group of reported ‘insiders’ connected to management, and then an outside company, Randa.  Besides the inherent interest of multi-bidder scenarios for an investor considering appraisal, both sides of this – increasingly chippy – fight have invoked appraisal as part of promoting their bids.  It’s a curious development.

The Perry Ellis special committee, in announcing that it found the slightly lower priced management bid to be better invoked appraisal, writing that Randa’s bid would not have appraisal rights – as opposed to the management connected bid, which would.  Randa responded that Florida law allows appraisal in insider-related transactions, but not for transactions (like Randa’s bid, according to Randa) that do not involve insiders.  What’s odd about invoking appraisal in one’s assertion that a certain bid is better than another is that appraisal generally (and in Florida, does) require that one vote against, or at least not vote for the transaction.  In theory, yes, the insider connected bid here carries appraisal rights for those dissatisfied with the deal, as opposed to Randa’s (higher) bid which does not carry appraisal.  One might imagine, though, that an investor voting against the lower, management connected bid, would actually cite Randa’s bid as showing a higher value.  In effect – the policy reason why the insider bid carries appraisal rights is basically exactly what is occurring: to protect a minority shareholder from having to take a price lower than what a competing bidder would pay.  On the other hand, one can readily read the special committee statement as invoking appraisal in order to demonstrate that it considered factors – such as the remedies available to a minority, dissenting shareholder – even beyond the benefit to “yes” voters.

We’ve written before about Florida appraisal, and this deal shows that appraisal is, and remains, a potential remedy outside of Delaware.

While the vast majority of United States appraisal rights cases occur in Delaware, several other states — Florida among them — also recognize appraisal rights.  This past summer, a Florida appellate court affirmed a minority shareholder’s right to exercise appraisal rights when the company sought to redeem its shares.  In Omes v. Ultra Enterprises, Inc., 2017 WL 3611546 (Fla. Dist. Ct. App. Aug. 23, 2017), directors of Ultra Enterprises, which owns the intellectual property of the Ultra Music Festival, voted to redeem the shares of Alex Omes, one of Ultra’s co-founders, due to Omes’ self-dealing and competing personal businesses.  Ultra notified Omes of the board’s decision and his right to seek appraisal to determine the value of his shares.  Omes exercised his appraisal rights, rejecting Ultra’s valuation of $1,200 per share, and instead offering his own countervaluation of $111,111.11 per share.

After a bench trial, the trial court found that the appraisal process was properly invoked.  In a turnabout of the more conventional use of appraisal, the appellate court observed that a majority shareholder has a right to engage the appraisal process “to eliminate the rights of dissenting shareholders and put an end to corporate strife.” The court ultimately determined that Ultra’s valuation analysis was supported by competent, substantial evidence.  The case demonstrates that appraisal rights are indeed available in Florida, and we are continuing to watch out for additional rulings outside Delaware, as we posted about yesterday.